Make My Trip’s (MMYT’s) transaction market share gain strategy has been successful, with the company growing standalone hotel transactions by 500%+ (vs 325-375% y-o-y guidance) and gaining share of 4pp to 29% in online hotel booking in India.
But the market share gain is coming at a very high cost, with adjusted EPS losses likely expanding to $2.37 (vs $1.07 earlier) in FY17F and $1.49 (vs $0.36 earlier) in FY18F, and profitability unlikely even in FY19F.
Given high aggression and competitive intensity, we see cash burn of $200 million over the next 2 years, leading to a possibility of the firm having to raise at least $50 million in cash by FY18F, despite the recent infusion of $180 million in convertible debt by Ctrip, the largest OTA (online travel agency) in China.
With deep-pocketed competition from Goibibo (owned by Naspers) and Oyo (backed by Softbank), we believe high competitive intensity could likely continue for the next 1.5-2 years; hence we retain our cautious stance, but upgrade to Neutral given that the stock has corrected by 18%+ in the last three months.
Catalyst: Continued high competitive intensity or any growth slowdown
Transaction market share gains comes with material burn: MMYT’s transaction market share gain strategy is visible in materially better than expected 500%+ y-o-y growth in standalone hotel transactions in Q4. However, this has come at the cost of lower H&P average transaction values (ATV) (down 57% y-o-y), near doubling of losses vs expectations at $0.82 (vs est. of $0.40) and depletion of $67 million q-o-q in cash in Q4.
We look for a revenue CAGR of 24% (8% Air, 36% H&P) over FY16-19F, with elevated losses of $2.37/1.49 over FY17/18F. Our reduced TP of $14 (vs. $14.5 earlier) is based on an FY18F EV/Sales multiple of 3x, a 40% discount to global peers, justified in our view given MMYT’s smaller size, high competitive intensity (vs undisputed leadership) and uncertainty on profitability roadmap (vs profitable global peers) . We prefer JUST IN (Buy) and INFOE IN (Buy) within India internet.
Cost of market share gain remains very high
MMYT has over the last 3 quarters increased its aggression on brand promotion, pricing, cash backs and discounts, especially in the hotels & packages space to counter competition from Goibibo and Oyo (largest budget hotel aggregator in India). This has further got a fillip from the raise of convertible debt from Ctrip of $180 million. This has provided MMYT with the financial muscle to compete aggressively.
What were the reasons for our downgrade to Reduce in Feb-16 Discomfort at the high competitive intensity in the OTA space, will likely lead to 1) slower revenue growth, 2) expansion of losses, and 3) push back of profitability to FY19F at MMYT. In addition, our view was that competition is equally well funded, with Naspers having infused $250 million into Goibibo in Feb 2016 and Oyo raising $225.7 million in all and $100 million in Apr 2016, which meant that this high competitive intensity could continue for the next 1.5-2 years. Accordingly, we doubled our loss expectations for MMYT in FY16/17F to $1 per share and pushed back profitability to FY19F.
MMYT transaction market share gains are playing out ….
MMYT’s transaction market share gain strategy is playing out better than expected with more than 500% growth in standalone hotel transactions (materially ahead of guidance of 325-375% y-o-y) and corroborated by the latest Millward Brown survey suggesting MMYT has won material market share of 4pp overall to 29% in Mar-16 (vs 25% in Jan-16).
The trends on market share gains though are divergent across 3 star or lower categories, where MMYT has gained material share, and 4/5 star categories (which are in our view the larger revenue generator for MMYT currently) where it has lost share.
In 3 star or lower categories MMYT market share has increased by 8pp to 33% and 13pp to 35% in Mar 2016 respectively (vs last survey in Jan-16). However, MMYT has lost market share in the higher value 4/5 star category with 4pp reduction to 22% (vs the last survey in Jan 2016). From a transactions growth perspective, the 3 star or lower categories are larger, but from a net revenue perspective we believe the 4/5 star categories are larger for MMYT still, where Goibibo seems to be playing catch up.